Full-Capacity Flat-Rate Equilibrium: Existence and Non-Optimality

Abstract

In this paper we study full-capacity flat-rate equilibrium in an economy with a numeraire and a dated commodity the latter being physically identical in all other respects. We show that the equilibrium exists even if the unit cost of production is time varying and the associated allocation is Pareto dominated only in a very large number of cases (and not invariably). We provide an example of an economy where the allocation associated with the unique price equilibrium has a unique peak period and is Pareto optimal for all values of the initial endowment. The final result provides a necessary and sufficient condition for a full-capacity flat rate equilibrium satisfying unique peak period property to be associated with a Pareto optimal allocation.

Keywords: equilibrium, existence, flat-rate, full capacity, Pareto optimal

JEL Classification: C62, D51, D59